The Hidden Rotation in Indian Markets: Capex Leads, Mid/Smallcaps Rise, Financials Lag 02May2026
(This is my 506th blog since 2010. Over the years, I have covered global financial markets, with a focus on India, and continue to share insights to help readers understand complex topics in simple language.
The views expressed here are for information purposes only and should not be construed as a recommendation or investment advice. While the author is a CFA Charterholder with nearly 25 years of experience in financial markets, this content is intended to share general insights and does not constitute financial guidance.
Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)
Section 1: Momentum Shifts
This short analysis looks at momentum-based stock rotation across a broad slice of the Indian market using Nifty 100, Nifty MidSmallcap 400 and Nifty Microcap 250 indices.
By tracking which stocks are gaining or losing momentum within these segments, let us see how sector leadership is changing in the overall market setup.
Three segments analysed here are:
1) Nifty 100 (largecap stocks)
2) Nifty MidSmallcap 400 (mid and smallcap stocks)
3) Nifty Microcap 250 (microcap stocks)
These three indices form part of the Nifty Total Market index. The tree diagram is >
Shortcomings of the current observation framework:
It relies heavily on short-term (1 month, 3 moth, 6 month) price action, which can exaggerate temporary moves and miss longer structural trends.
It does not clearly distinguish between strong institutional accumulation and low-liquidity or news-driven spikes, especially in microcaps.
Sector conclusions are drawn qualitatively without adjusting for relative performance versus the broader index or market cap weight.
All stocks are treated equally, without weighting by liquidity, size or trend persistence, which can distort the true market leadership picture.
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Related blogs:
How Valuations Shape Returns and Risk in Select NSE Indices: A 6-Index, 6-Year Study of Return and Risk Across Valuation Regimes 21Apr2026
NSE Indices Calendar Year Returns: 2006 to 2025 07Jan2026
BSE 500 Versus Nifty 500: Same Market, Different Indices 02Jan2026
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Capex-led leadership is the core market driver:
Across large, mid/small and microcap segments within the Nifty Total Market proxy, capital goods, infrastructure, power and industrials are consistently dominating momentum.
This kind of alignment across market caps indicates a genuine economic cycle rather than a short-term trade, with strong earnings visibility and order book-driven confidence anchoring the trend.
Largecap financials are in a broad-based cooling phase:
Banks and financials, in largecap space, are underperforming across all three segments, from large caps in the Nifty 100 to smaller names further down the market cap spectrum.
The uniformity of this weakness suggests a sector-wide pause or de-rating rather than isolated stock issues, making financials the clearest lagging pocket in the current market structure.
Several PSU banks too have lost their momentum in the recent period.
Breadth is expanding but leadership is narrow:
Participation is widening from large caps into mid/small and micro caps, which is structurally bullish. However, this breadth is heavily concentrated around a single macro theme—capex / industrials—rather than being evenly distributed.
That makes the market strong but somewhat dependent on the continuation of this dominant trend.
Pharma CDMO stocks
Indian pharma CDMO stocks have seen strong momentum over the past month. The rally is supported by increased contract manufacturing orders (especially for GLP-1 / weight-loss and oncology treatments), margin optimism and renewed interest in India’s outsourcing opportunity from global pharma majors.
The CDMO stocks have also been supported by positive commentary / results from a couple of companies that declared their Jan-Mar2026 quarterly results.
Early signs of speculative activity are emerging:
Within the Nifty Microcap 250, momentum is beginning to extend beyond high-quality or leadership-driven names into more varied and lower-conviction sectors.
This suggests that risk appetite is gradually increasing, with capital flowing into areas that are not part of the core market leadership.
While this behavior is still early and not extreme, it often marks the initial stage of broader speculative participation.
It can be viewed as a cautionary signal that the market may be shifting from a more disciplined, theme-driven advance toward a more aggressive and less selective phase.
Summary:
Overall, the Indian market is showing a clear internal rotation, with capex / industrials leading the trend while financials remain under pressure.
Mid- and small-caps are confirming broader participation, suggesting that the trend is not narrowly driven but still concentrated around a few key themes.
The key takeaway is that this is a rotation-led market, where identifying sector leadership matters more than tracking index levels alone.
Section 2: Sector Indices Return Performance
This section builds on the earlier analysis by moving from observed momentum shifts to actual return performance across key sector indices.
In the previous discussion, we identified a clear internal rotation in the Indian market, with capex / industrials leading while financials showed mixed performance and mid- and small-caps gained participation.
This section now uses sector-wise return data to confirm and quantify those trends in a more concrete way.
Chart showing Nifty sector indices trailing returns as of 30 April 2026, including only sectors with a direct Nifty sector index mapping (top 8 sectors shown; other sectors such as capital goods and telecom excluded due to lack of standalone index representation) >
Financial Services shows internal divergence:
Nifty Financial Services delivered, as shown in the above chart, a 1 month return of 9.1 per cent, but a negative 3 month return of minus 6.1 per cent and a flat to slightly negative 1 year return of minus 0.8 per cent.
However, this masks a strong divergence within the segment, as Nifty MidSmall Financial Services index delivered a much stronger 1 month return of 17.5 per cent and a 1 year return of 31.9 per cent, indicating that leadership is shifting away from large caps toward smaller financials.
Cyclical sectors show strong short term leadership:
Nifty Metal stands out with 1 month return of 15.3 per cent and a strong 1 year return of 51.0 per cent, while Nifty Auto also shows resilience with 9.0 per cent in 1 month and 17.4 per cent in 1 year.
Nifty Oil and Gas and Consumer Durables also show steady positive momentum across timeframes.
Metals are likely in a late-cycle strong momentum phase. This means returns may still be strong, but downside risk and sensitivity to global conditions are gradually increasing.
Investors need to be aware of risk-reward equation in metal sector.
This confirms that cyclical and real economy linked sectors are leading the current market phase.
Real estate and high beta sectors show sharp momentum bursts:
Nifty Realty delivered a strong 1 month return of 21.87 per cent, although its longer term performance remains weaker, indicating a sharp but uneven cyclical rebound.
Similarly, small cap oriented indices such as Nifty Microcap 250 with 21.6 per cent 1 month return and Nifty Smallcap 250 with 17.1 per cent show strong short term risk appetite.
Nifty Next 50 also recorded 15.5 per cent 1 month return, reinforcing broad based participation across market caps.
Defensive and export-oriented sectors are under pressure despite currency support:
Nifty IT remains the clearest laggard with minus 22.7 per cent 3 month return and minus 16.0 per cent 1 year return, showing persistent structural weakness.
Even Nifty Healthcare has not meaningfully benefited from rupee depreciation, indicating that currency tailwinds are not translating into performance.
This weakness across defensive (Nifty FMCG 1 year return is minus 8.2 per cent) and export-oriented sectors contrasts sharply with domestic cyclical leadership, reinforcing a clear market preference for capital cycle and real-economy driven themes over defensives.
Overall market structure shows strong but uneven breadth:
Across the Nifty Total Market, sector performance indicates strong short term momentum across MidSmall cap financials, cyclicals and small caps, while longer term leadership is concentrated in metals and select capex / industrials.
The key takeaway is that market participation is broadening significantly, but leadership remains cyclical and uneven rather than uniformly distributed across all sectors.
Note on the Nifty Sector Indices Returns chart: In the Nifty Total Market (750 stocks), capital goods sector has a weight of 7.7 per cent, making it one of the most important non-index-mapped sectors after financials.
In fact, it is the second highest weight in the index, but cannot be directly aligned to any specific Nifty sector index.
Power accounts for 4.0 per cent, telecommunications 3.7 per cent and consumer services 3.5 per cent, together highlighting the meaningful contribution of capex / industrials sectors to the overall market structure.
Section 3: Valuation and overall outlook
Nifty Sector indices valuation data (Top 8 sectors by weight % in Nifty Total Market that can be aligned directly to a Nifty sector index) >
Valuations across several leading sectors are elevated, especially in consumption and defensives. Sectors like Nifty Consumer Durables (PE 59.2, PB 12.2), Nifty Healthcare (PE 37.9) and Nifty FMCG (PE 36.3) are trading at rich multiples.
Even in cyclical leaders, valuations are no longer cheap, with Nifty Auto (PE 30.7) and Nifty Metal (PE 21.8) reflecting re-rating alongside earnings momentum.
Overall, while the market remains in a strong phase, elevated valuations across sectors suggest a tighter risk-reward balance and higher sensitivity to earnings and macro outcomes.
Metal and mining stocks are now trading at valuations comparable to or higher than IT, reflecting a clear shift toward domestic, capex-driven themes over export-led sectors.
The “new normal” seems to be that cyclicals like metals are no longer cheap value plays, but are being priced as growth beneficiaries of the current economic cycle.
Outlook:
The next 6 to 12 months for the Indian equity market are likely to be driven more by macro factors than by current sector momentum alone.
While the Nifty Total Market still shows strong internal rotation toward capex / industrials, sustainability of this trend will depend heavily on FPI flows, which remain a key driver of liquidity and sentiment across large caps.
Currency movement and fiscal dynamics will also play an important role. Persistent rupee depreciation has not uniformly translated into export sector strength, as seen in IT and healthcare, while the failure of Thiru PM Modi government to pass on elevated international crude oil prices (a political economy decision to win assembly elections) to Indian consumers could gradually stoke inflationary trends, increasing bond yields and putting pressure on interest outgo of Government of India.
On the domestic side, earnings outcomes and RBI policy will be critical. With many annual / quarterly results still unfolding as of 02May2026, the durability of current leadership trends is yet to be fully tested by profits and revenues.
At the same time, RBI’s stance will shape liquidity conditions, making this a phase where flows, monetary / fiscal / economic policy and earnings together will decide whether the current rotation evolves into a sustained cycle or begins to narrow.
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Additional data 1:
Capital goods is a big conglomerate sector; encompassing many sub-sectors, like, industrial products, industrial manufacturing, electrical equipment and aerospace & defence; and they are further divided into:
capital goods compressors
capital goods electrical equipment
capital goods engineering
capital goods engines
capital goods pumps
capital goods rail wagons
capital goods railways
capital goods solar
For individual stocks in the "capital goods" sector, Check Update 15Aug2025 in my blog: Stocks and Peer Comparison by Industry" dated 16Feb2024.
Also check Update 05Sep2025 in the same blog with list of stocks as per Nifty Total Market Index.
Screener.in lists around 850 companies in the "Capital Goods" sector. 😀
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Additional data 2:
Stocks in Nifty 100 index (large caps) showing strong momentum based on 1-month, 3-month and 6-month returns and don't forget to check their valuation >
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Additional data 3:
Stocks in Nifty MidSmallcap 400 index (Mid/Small caps) showing strong momentum based on 1-month, 3-month and 6-month returns and don't forget to check their valuation >
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Additional data 4:
Stocks in Nifty Microcap 250 index (micro caps) showing strong momentum based on 1-month, 3-month and 6-month returns and don't forget to check their valuation >
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